The Biggest Benefits Of A Stock Market Meltdown

Fed Chair and centimillionaire Jerome Powell is a DIRE Movement enthusiast by continuing to raise rates despite a global stock market sell off. More pain is on the horizon as JP bows to no one.

I’ve never liked investing in stocks as much as I enjoy investing in real estate due to the volatility, occasional corporate malfeasance, and countless uncontrollable exogenous variables stocks face.

When you’re but a piddly minority investor with no say in anything, investing in stocks can sometimes feel hopeless. However, I recognize that investing in stocks is one of the best ways to build wealth over the long term, which is why I’ll always have at least 20% of my net worth in stocks.

Although losing money in the stock market is never fun, I thought I’d highlight some benefits of a stock market meltdown. After all, if it wasn’t for the global financial crisis, Financial Samurai would never have been born.

The Benefits Of A Stock Market Meltdown

More humility. People tend to brag about their wins and hide their losses. When times are good, there is an incessant amount of boasting that can get extremely annoying after a while. It’s very similar to people posting only the best moments of their lives on social media. A return to modesty is a wonderful benefit of a cratering stock market.

Reset expectations. People tend to get bearish when stocks are going down, and bullish when stocks are going up. Being a contrarian thinker by forecasting what might happen in the future is extremely difficult, but worth practicing. With lower earnings growth expectations, stocks now have a higher chance of beating beaten-down expectations, resulting in better future performance. The below chart shows that global fund managers are as pessimistic as they were during the global financial crisis, which seems excessive.

Fewer crowds. A stock market boom creates more jobs. More jobs bring more people to restaurants, bars, and other entertainment venues. Due to more people, reservations and tickets are harder to come by. Everything is also more expensive. Further, traffic can become unbearable to the point where you don’t want to leave the house. Back in 2001, San Francisco was a pleasant city with lots more room thanks to the dotcom bubble pop. Now, San Francisco feels more like Manhattan, where every time you step outside feels like going to battle.

The return of mega unemployment benefits. Sometimes, you just need a break from the grind. During the last financial crisis, the federal government stepped in and offered 73 weeks of additional unemployment benefits on top of the maximum 26 weeks of unemployment benefits by the state. Receiving up to $450/week or $1,900/month in some states can sure go a long way. Add on a potential severance package and thousands of Americans might finally be able to afford that long-term vacation they so desperately need.

Development of better financial habits. When you’re losing a lot of money in the stock market, you’re forced to look at your budget to see where you can cut spending and boost saving. You’ll also spend more time analyzing your net worth because it’s suddenly at great risk. It often takes a financial shock to finally start aggressively staying on top of your finances. When times are good, it’s easy to take your financial well-being for granted.

Let’s see if we can match the Great Depression’s return this December!

Diversifying investments. A lot of folks put their entire retirement nest egg into the stock market. It’s almost like having blind faith that index investing will all work out. If they can hold on for the long-term, their investments will probably turn out OK. But tell that to the people who were shaken out during the 2008-2009 financial crisis. If only they had a broader diversification of their wealth into bonds, real estate, and alternative investments. They may have been able to more easily pull through the mire.

A catalyst to create a new income stream from nothing. Besides investing in other passive income generating investments, a bad enough stock market correction might force you to create your own income stream that is less dependent on exogenous variables outside of your control. Plenty of lifestyle businesses and traditional businesses were created during the last downturn because people simply had had enough of depending on other people for returns.

My Favorite Benefit Of A Stock Market Meltdown

Stock market meltdowns are great for those who are looking to buy stocks or buy pretty much anything that is dependent on the health of the economy. The worse the economy gets, the lower prices go.

My favorite benefit of a stock market meltdown is cheaper real estate prices. Unlike stocks, which can correct overnight, real estate usually takes years to decline given the asset class is less liquid. But I like slow-moving train wrecks because they give me the time to discover the ideal property without having to make a snap decision.

Although investment real estate can often be a defensive asset class during a downturn due to sticky rents (see the outperformance in REITs and alternative real estate investments), a primary residence may not perform as well if a homeowner gets a pay cut or loses his or her job. During the last recession, thousands of homeowners were forced to fire sale their homes at huge losses.

Therefore, those of you searching for a new primary residence should love a stock market collapse, especially while the Fed is raising rates. Already, inventory is growing in many big cities around the country. As the fear of a recession grows, further price declines are an inevitability.

4Q2018 YoY inventory up in many markets

Since 2016 I’ve been looking for my Honolulu beach home and years later, I’m absolutely thrilled to see continued weakness in residential property prices. This one home I visited in 2016 had an asking price of $4.7M. They might have accepted $4.5M if I had put in an offer. Today, I think there’s a decent chance the house could be had for $3.5M, a 25.5% decline from their original asking price.

It feels amazing to just wait and watch prices fall. This is as close to making money by doing nothing as I’ve ever seen. No wonder why economists fear deflation. If enough people just sit on their hands earning a healthy risk-free yield, self-perpetuating a decline in asset prices, economies fall apart as nobody ends up buying anything!

As the economy worsens, luxury assets that people don’t really need suffer the most. If you’ve been looking to inflate your lifestyle, a stock market collapse could be just what the doctor ordered!

Recommendation: Manage your finances in one place with Personal Capital, the best free financial tool on the web. It’s important to stay on top of your net worth, understand your risk exposure, and make sure your retirement plans are on track. Get your finances right the first time. There’s no rewind button in life.

Author Bio: Sam started Financial Samurai in 2009 to help people achieve financial freedom sooner, rather than later. He spent 13 years working in investment banking, earned his MBA from UC Berkeley, and retired at age 34 in San Francisco.

Sam’s favorite free financial tool he’s been using since 2012 to manage his net worth is Personal Capital. Every quarter, Sam runs his investments through their free Retirement Planner and Investment Checkup tool to make sure he stays financially free, forever. It’s free and easy to use.

For investing opportunities in 2019, Sam is most interested in investing in the heartland of America through real estate crowdfunding. Property valuations are much cheaper and net rental yields are much higher. There is a demographic trend towards moving away from higher cost areas of the country to lower cost areas thanks to technology.

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Comments

Absolutely the biggest benefit is that’s it’s one big Black Friday Clearance sale. And if you’ve been though a few meltdowns like I have and are still young enough to not need the money soon, then it’s the perfect sweet spot to buy more. I’ve got plenty of cash sitting on the side waiting.

I haven’t bought any real estate in a couple years. Typically buy something every 3 or so but with prices so high I’ve stayed away. I’d like to jump back in, but until then I just opened up a 6 mo. CD paying 2.3%. Best rate I’ve seen around here in quite a few years.

Umm. You could just open up a high yield money market account with Ally bank or any other online lender. Rates are 2% currently and the money is always liquid, like a savings account. Not sure the 0.3% Increase you’re getting is worth tying money up for 6months.

How a stock market meltdown effects an individual really depends on their stage in life.

If you are in the beginning/early part of your investing career a bear market is a blessing as you can buy stocks at a fire sale.

If you are about to pull the trigger to retire a stock market meltdown could be the worst thing as it will result in sequence of return risk that can cause your portfolio to be stressed to the point that it may not support the intended length of retirement.

The first 5 years or so of retirement are super sensitive to the stock market and the survivability of your portfolio. Like you I have dabbled in real estate to hopefully create passive income streams that at least provide a floor for income that may allow me to weather the storm of a stock market crash early in retirement

Non existent inflation? I don’t know about you but I’m seeing something close to what the Chapwood Index indicates. If you account for the shrinking of net contents, then yeah, there’s about 10% inflation.

I was thinking about inflation a lot. The government says we only have around a 2% annual inflation rate. But if you look at things that matter, such as healthcare, college tuition, food and housing prices, clearly 2% is too low.

But now that housing prices are declining in many coastal cities and people are wisening up to the fact that paying crazy tuition For education that you can get for free on the Internet is ridiculous, I think inflation might not be as bad anymore.

We just need to get healthcare costs under control, and then I think a lot of inflationary fears will dissipate.

Problem is, many of these consumer staples companies that have monopolies on store shelf space have taken out so much debt to buyback shares to goose exec compensation that we as chump consumers have to pay this corporate debt back in the form as outrageous price increases and smaller packages. The C-suite skates with millions in options and the workaday slob has to pay for it eventually at the checkout counter.

This practice of buybacks with debt should be illegal. If you want to do it out of earnings then ok, but this financial engineering is scandulous. Nobody cares as long as 401ks keep going up, but the back end of this is going to be very ugly and one reason why stocks may be in for a L-shaped recovery when the bottom is ultimately reached.

Let’s say Company A has $100 million in EBITDA and $200 million in debt (2x leveraged) and Company B has $100 million in EBITDA and $0 in debt. Why couldn’t Company B borrow $100 million for buybacks in this example since they would still be lower levered than their peers.

Working in the industry as head of IR for SMID cap company, Share-buy are pushed by portfolio managers who own our stock 10x more than internally. The way you make it uneconomical is for bond managers to stop buying them when the leverage starts to get high. The more money people like you and I put into their 401ks with bond $, the more likely they can get away with dumb leverage for buybacks. Buybacks with debt really aren’t a problem. The LBOs with 6-12x+ net leverage are where companies tend to go bankrupt.

I have previously heard the expression “be greedy when others are fearful”, but this is the first correction where I am feeling that on an emotional level. I literally can’t believe my luck at how cheap things are getting. UK REITs are getting hammered by Brexit fears, and the FTSE is well on its way to bear market territory. Now I just need a good enough cash stream from my employment to pick up these bargains.

Well it’s my rebalancing month, so the timing is fortunate but irrelevant. I ended up buying more of my S&P ETF at it’s lowest price of the year. I expect it will go lower, but I don’t care – when it’s time to rebalance, I rebalance. I’m expecting a 20-30% down year within the next few years, so bring on the collapse. It will be followed by a recovery; if not, we’ve got bigger problems than our account balances.

Hence why I like real estate. I feel a little like Neo in the Matrix, dodging bullets because I see very clearly the slow down and resultant price declines in the real estate market I’m looking at (SF, Honolulu).

I’ve been observing this slow down for almost 3 years now in Honolulu. And I think the slow down in Hon real estate will last for at least one more year, if not three more years.

Much harder to anticipate a decline in stock prices because the movements are so fast and vicious.

It’s officially a bear market now after the brutal Friday on Wall Street. For some of my ex-neighbors and friends who work at Facebook and Apple and get most of their pay in RSU’s, it has been super painful. I honestly don’t know if Facebook stock will recover to it’s previous highs in the next 5 years.

You continue to be on point, Sam. En fuego if you will ( not to be confused with FIRE of course ). I tend to believe that many folks have yet again tapped out their personal “lines of credit”…whether it be credit cards, auto loans, home equity etc. This is the beginning of the much anticpated slow down after a decade of growing decadence.

I’m about 7 years from retirement, so I’m a little more nervous for this pullback than I have been for previous ones. If history is any indicator, things will tighten up for a few years, then the market will rebound nicely.

It depends on your asset allocation And risk exposure. Seven years is still a relatively long ways away. But if things get really ugly, you might lose two or three years from her goal.

Just run different simulations on what your net worth will be on different return assumptions. I’m really just trying to use this downturn as an opportunity for folks to get more realistic about their finances and their goals.

Good perspective, Sam. I have been watching a list of REITs that I have wanted to add to the portfolio and weakness is now starting to show. Been writing puts on a few to dip my toe in to see if a position can be established. The mindset quickly has changed from a previous ‘should I sell’ to a now ‘should I buy.’ The wild swings can be filled with anxiety but I try to see both the ups and downs as opportunities. Happy Holidays to you and everyone else.

I’ve thought things have been overpriced for years now and I would not be surprised to see a stock market decline of 50%. The same for real estate. When my in-laws sold their home in San Jose for 1.3 Million, in spite of actual roof leaks in the living room, termite damage and ancient plumbing rust, we were happy for them, but shaking our heads in disbelief. And if the traffic lets up a bit heading over to the Bay Area from the central valley, that would not bother me a bit. Even if it does mean seeing our portfolio reset to a more reasonable value. We’re ready.

We sold a crappy house in Los Gatos last January for $2.32 million. 1930 home with lots of issues including a cracked chimney and mostly original windows. We also got rid of our condo on Lake Tahoe in March for a premium price. We are so glad to get out of that market(and state) when we did.

Hopefully the housing prices in Naples Florida will drop soon. We are looking to get a single family home there where will spend some of the winter months when our last child is off to college in a few years.

Also presents a great opportunity to do Roth IRA conversions. Can stuff more shares into a conversion without bumping up a marginal tax bracket. Hopefully can capture some tax free growth when the market recovers.

Lagniappe:
It is a lot easier to comfortable with the smaller Roth balance compared to traditional IRA account balance when you realize Roth is 100% yours and traditional account is shared between you and Uncle Sam. I multiple my tax deferred retirement accounts by 2/3 to get a better idea of “my share” of those accounts.

Exactly, a stock market crash correlates with a severe recession and a real estate crash so there won’t just be bargain equities. Every kind of luxury product from lightly used Jags to private jets will be on sale as well as cheaper items like used iPhones and boats. I don’t need a jet but I will probably want to replace my smoking fast $7,000 sports car in a couple of years with something much newer and lower mileage and I bet there will be a ton of sweet repo’s available. I may feel like a vulture but I’ll get over it.

Yep, there were a lot of hardly used Aeron chairs for sale right after the dot.com crash. (They go for $1k new and are generally worth it if you do a lot of sitting.) One person’s despair, another’s opportunity. The real financial world doesn’t come with training wheels or airbags.

By the same token, whether you have your money in stocks, bonds, real estate, collectibles, or just buried in the backyard, you have to have it somewhere and in a downturn, all of these can suffer.

Agree with all of this. The downturn recently has awoken me from a stoupor of sorts. For the past few years I’ve rationalized slowing down my professional life to take on more creative pursuits, with the idea the market would keep me afloat. As someone who started working professionally right after the 2000 crash, and suffered the 2008 collapse, my better judgment and work ethic were being poked by a surging portfolio in the last 8-9 years. Nothing like a steep turn south to wake you up, refocus, and admit, “I can be creative, and productive, while working hard at a daily job… I am going to stay the course.”

I’m investing steadily all the way down, but being smart about it. I’ve got a healthy cash reserve earning 2.1% in an online savings account, and along with index funds, I’ll be doing more CD and low interest, safe harbor, style moves with cash to better position myself for more modest returns in 2019. My 401k is staying the course. I have many, many years before I can withdrawal, so I’ll keep pouring money in and let the recovery come when it will. My personal money will be dived between savings at a modest interest rate, and index funds I buy at the newly discounted (and sure to go lower) prices with the idea these are longer term investments and I have the cash should I need it to float.

Basically, I see this as a buying opportunity and a chance to start sowing the seeds for the recovery in the next year to year and a half, but I will make sure to have enough in savings to survive a possible layoff and whatever the next year and a half might bring to avoid panic selling stocks.

I’m not so convinced. If there is a trade agreement, decline will reverse quickly. 20% corporate tax cuts should offset any business losses in China except for small number of corporations. Right now, I see this as manufactured with an overreaction from the market. Interest rates are not that bad, but that could all change quickly for the worse or better. Oil prices are not good, and will show more of the future. The fear is wonderful, and I am nibbling at small pool of stocks. Real-estate in bay area has gone from overpriced to slightly less overpriced, but I don’t see much in job losses. 4 million properties seem to be sitting for 90+ days, and 600k properties seem to be sitting 30 days. I think negative sentiment could finally pop the venture capital bubble in the bay and lower real-estate another 10% which would begin to get interesting. For now I continue to invest dividends on the dips, and looking for property with a view, but there is no rush at current prices.

One positive highlight about bear markets, is people in the bay become much more open to dating, but I’m taken, sorry.

It’s unfortunate the markets continue to nose dive. Stressful indeed. It takes experiencing tough times to truly appreciate the good though. There is a lot to that and the saying what doesn’t kill us makes us stronger. And also makes us take more steps to plan, save, diversify, appreciate what we have etc.

I agree with the benefits you wrote about and your timing is spot on. I’m gonna use these rocky markets to work on better financial habits and appreciating more of what I have. Good point on real estate for those looking to buy. It will be interesting to see how coastal city real estate prices react next year.

Great article Sam! I’m finishing up an article on the San Diego housing market and am clearly seeing the same price action. In some cases a 15% decrease in home values in less than a year. I feel like we still got more to go. Licking my chops over here for a good entry point in the housing market as I have been looking at homes all year long.

Yeah, definitely be patient with the San Diego real estate market. It got pretty bad during the last global financial crisis, especially condos. I think you have at least another 12 months of softness down there. No rush! Negotiate aggressively. Fear begets fear and more inventory comes online.

That’s why I went ahead and bought to enjoy it now and plan on retiring in the next 8-10 years and spending even more time there, Winter and Summer. I probably spent more of my percentage of net worth than you recommend, but I have been paying quite a bit extra on the principal in the year that I have owned so far. So far I have been able to pay all the HOA costs plus a little extra and it’s booked pretty solid this ski season, the mountain and village has had a lot of investment in the past few years and even the summer stays pretty busy. Thank you for all the info, I’ve really learned a lot.

Although the recent sell-off in stocks is a little unsettling, it’s worth noting that the federal reserve are still very bullish about the economy. We also had a similar pullback in 2015/2016 and an even bigger one in 2011. I’m hoping it’s just a pullback…

Hope is not a viable strategy. Whether it is a pull back of long term bear market depends on a few critical factors down the road. At times, investing is like fighting a war. There are times when your troops would get ambushed by the enemies coming out from nowhere. Risk mitigation strategy is like fighting back and keeping your troop loss low so that you can continue to fight for another day.

Why do you need to buffer your finances? Your website is generating more income than you made at your previous high-paying job, you have built up a substantial passive income stream, and you get to pick your own hours. You’re living the dream!

Your honesty and transparency are great assets. I think that your story of being a recovering FIRE believer returning to the working world could actually make your site more popular and result in more income for you and your family. I think it could be a very compelling human interest story! Maybe like a redemption story.

I’ve enjoyed reading your blog for a few years and must admit I always thought FIRE wouldn’t work.

Dad and granddad were oil men and taught me everything is a boom and bust. Make as much money in the boom times as you can, then when the bust comes don’t fight it, just take your beatings and set up for the next boom.

I make a top salary in tech but i live in a tiny 0 bedroom apartment and don’t have a car. I save and invest more money than most people make. I’m very happy with my lifestyle and my philosophy is if you always spend like you’re in a bust you never need to fear for your lifestyle security.

Yeah a comeback story! I think you’ve lived a fascinating life that few attempt but many dream about.

I don’t have balance, I work and I accrue capital, I’m 35.

The way I see it is Republicans have taken more control of our country every year for the past 30 years. Every year more wealth flows from the middle class to the 1%. And the engines of wealth creation are slowing down – both bonds and the stock market return far less over the last 15 years than the 15 before that.

I fully expect this 30 year trend to continue. So the way I see it I’m lucky I can work my butt off with no work/life balance and accrue capital today. Because the generation after us won’t even have that option once the engines of wealth creation stall and the 1% focuses on hoarding wealth.

Interesting post! My husband and I were able to pocket $50k from the condo that we bought when the economy crashed last time. We are doing what we can to get ready for the next one so we can use it to our advantage as much as possible. We are hoping to invest in a few more properties if the housing market dips again and add that to our asset portfolio.

Maybe this is the start of a prolonged downturn. However, while I think the days of everything going up in tandem are likely gone given the rate environment, there seems to be significant value in certain areas of the equity market if one is willing to do some homework.

I am definitely not an expert and do not have a ton of experience, but I have worked in corporate banking for over 4 years now at a larger institution. Can say that while leveraged loan spreads are widening, loan demand is still strong, driven primarily by M&A. As of the September quarter (keeping in mind these companies report late October / November), most of the companies I cover were not flagging any serious macro softness. Maybe we will see it in the December quarter.

As a cash buyer looking for a new primary home, I readily welcome the elimination of my mortgage-driven competition. Interest rates only matter to me in that my cash is earning more as I wait, and prices in Houston are melting before my eyes.

I haven’t found good y-o-y selling statistics, but I am seeing lots of nice places drop their asking price 10-30% from May. (and, that have been on the market that long) If there really is something to it, then waterfront will drop. You also have to watch out for neighborhoods that flooded during Harvey.

If the economy cant handle 2.5-2.75% fed funds, than this wasn’t a bull market, nor a real recovery.And R.E especially Hi will take a serious bruising, and there pension liabilities won’t feel good.
Powel did/does what he has to do,by mandate and data.
Wild ungrounded violent policy swings across many intersections and jawboning from other branches definitely hasn’t helped.

It will be interesting to see where the bottom forms in this market. I’m waiting on the sidelines with cash but I don’t see an entry point yet. It’s hard to believe a company such as Apple is trading at a forward P/E ratio of 10.30. I’m very close to jumping in on aapl and other quality stocks that are at a huge discount to where they will be in a few years IMO.

we’re not very young in our house, 50 and 55. i’m glad i raised cash from 3% to around 17% in october when the markets started to smell a little gamey. i would say our net worth is about 35% in a house that we own outright and the balance in investment accounts. it feels good to have 4-5 years living expenses in cash and zero debt. i’m still working at my low impact/decent paying job for now and just switched back to buying small caps in the ol’ 401. if stocks continue to shrink i’ll deploy cash when it gets above 20% of the total. i would rather sacrifice some potential return for the comfort of knowing we can fund our life for years if need be without having to sell. i learned a valuable lesson in ’09 when i bought with the market down 10% and it ended something like 60% down before coming back.

i like that picture of maggie siff in the betterment ads. she’s hot. enjoy the holidays.

I love reading your site as it always gives me great food for thought. We are a little heavy in the market, and that could be bad in the long run. It’s hard to say. We are certainly diversified there, and IMHO REITs are my exposure to property. I think I would have liked to have rebalanced a few months ago, as another commenter said, but aside from that, it’s all about earning now. My hope is that, like in 2008, this is just another buying opportunity. I did well in that one, and I am still not convinced that we are going into a recession yet. The fact that the Fed is still talking about raising rates in 2019 tells me that we have options at least to smooth out this coming recession. Time will tell

Nice post! I pulled 100k out of the market so that could start saving for a primary residence or a duplex. I ended up pulling out about 5 months ago and I was very lucky that there is this downturn. I hope what you’re saying is true and prices will fall. Seems that it doesn’t make sense to buy at an all time high.

Against the advice of a financially savvy friend/advisor I sold many of my equities last march and paid off my primary residence. So glad I did while the iron was still hot. Where is the new bottom for the DOW?

I am wondering how this will impact the Dallas real estate market, especially close to city center (uptown, oak lawn, highland park etc). Dallas has seen some of the largest gains in the country in the last decade and did not experience a heavy downturn compared to the rest of the US in 2008-2009. Do you think there will be a significant correction in Dallas given the ever growing population and strong job market?

I want to go to cash to from stocks and funds they are – 20 to -30 Pct lower now , stocks and funds qualities are not bad but itcame down with the market decline.
I also see cheaper stocks value now? It’s catch 20 . I donot want to bring fresh money from CD s etc also
Perhaps holding for 5 to 7 years is answer?
I am 20 Pct in the market and has enough cash and income to last for next 7 years..
Any ideas?

No need to wait for a stock correction to find a good investment property. They existing in all markets. You need to be ready to move when you find one. Some people are reading the tea leaves and moving some of their portfolio into REITS and actual real estate purchases. I have always suggested that real estate investment estate investment will in the long term earn more than stocks if you buy right.

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